Over the next several years, as the IRS spends 9 billion dollars to
implement their Tax Systems Modernization (TSM) plan, tax practitioners
will have no choice but to rethink the way they do business.

TSM is the first concerted IRS effort to bring together a patchwork
of independent computer systems, originally designed more than 30 years
ago. With an integrated tax processing and customer service system in
place, the IRS plans to offer taxpayers "a one-stop administrative
process for tax guidance."

To this end, the IRS is developing a number of TSM subsystems,
including the Document Processing Systems (DPS) for inputting tax
returns and other documents; a Wide Area Network (WAN) to connect
components of the new computer system together using ultra high speed
data communication links; and the Electronic Management System (EMS) for
receipt of returns electronically and for the exchange of information
with other taxing authorities.

Already, the IRS has spent a pretty penny to get tax preparers and
taxpayers on board with EMS and specifically electronic filing. Their
efforts to date, which include national promotions and seminars, are
paying off. More than 55,000 tax firms participated in the electronic
filing program in 1991. A whopping 10,876,141 electronically filed
returns were received by the IRS this last filing season. Even more
astounding is the accuracy rate for these returns -- over 97%!

The IRS projects that by 1998 more than 50% of all returns will be
filed electronically. To ensure hitting this mark, the IRS is currently
working on several major enhancements that will enable over 95% of all
individual returns to be filed electronically. Their expanded program
plans include:

* Continued acceptance of tax due returns nationwide, due to
successful testing during the 1991 tax season.

* Widespread marketing of a "File now and pay by April 15
program."

* Credit card legislation that would allow payment of tax due by
credit card (no pending).

* Elimination of the last piece of paper in the process, starting
with an "Electronic signature" test pilot program.

These and other IRS efforts, such as programs for electronically
transmitting informational, corporate, partnership and other types of
returns, are likely to result in billions of taxpayers and businesses
demanding electronic filing services.

How It Began

In 1985, an IRS research study showed more than 20% of all tax
returns were being prepared on some type of computer. It was then the
IRS recognized these returns were being printed out, mailed to them and
same data, previously in computer readable format, was being re-keyed
into the IRS computer system. This process was slow, prone to errors and
also very expensive. The initial concept of electronic filing was to
link the preparer's computer directly to the IRS computer. In 1986,
the IRS tested the concept with five tax preparation firms who filed
some 25,000 refund returns. Since then, the program has changed,
expanded and evolved into an effective method of sending tax returns to
the IRS.

Today, electronic filing is by far the most successful program in tax
administration since the IRS automated their processing in the 1950s. It
is one of the most visible and most important aspects of the IRS's
Tax Systems Modernization plan. According to a spokesman in the IRS
Public Affairs office, electronic filing is regarded as "the best
thing since the proverbial sliced bread." It's not hard to
figure out shy.

Electronic filing significantly reduces the IRS's labor costs.
An electronic return costs about four cents to process whereas a paper
one costs around 50 cents. In addition, paper returns average a 16%
error rate, while the electronic average is under 3%.

But what's good for the goose isn't always good for the
gander. Or is it? If electronic filing means greater efficiency, less
paper, lower costs and fewer errors for the IRS, what does it mean for
the tax preparer?

The Practitioners Perspective: "More Clients Are Asking For
It"

Particularly among taxpayers who are due refunds from the IRS,
electronic filing is catching on fast. Bill Opaska, a veteran tax
preparer in Pittsburgh, Pennsylvania, who used the indirect method to
file 100 clients' returns electronically this past tax year says,
"A lot of individuals use their tax refund as a windfall to take a
vacation or pay a pressing bill. These clients want to get their money
back from the IRS as quickly as possible. They're thrilled when
their refund shows up in their bank account 14 to 16 days after I
transmit their return to the IRS."

As more and more taxpayers seek out electronic filing, the
opportunities for practitioners to boost their business by offering this
service continues to increase. Electronic filing not only generates
extra fees from existing clients who are due refunds. It is also an
effective way of attracting new clients who are in search of faster
refunds.

Several practitioners found this to be true and cited "word of
mouth" as a big factor behind the increase in demand for electronic
filing services |is greater than~ James Bone, Jr., has been offering
indirect electronic filing in his Wyoming, Pennsylvania, practice since
1989. "Clients tell friends and colleagues that they received their
refund in two weeks and that I can do the same thing for them. A lot of
new clients have walked through my door as a result of electronic
filing."

Knowing When the IRS Receives Returns Is a Big Advantage

The IRS guarantees acceptance or rejection notification of
electronically filed returns within 48 hours of receipt. As part of this
acknowledgement process, the IRS's computer system checks each
return for accuracy, on a field-by-field basis, verifying that all data
has been entered properly and that there are no major errors. If there
is a mistake, the tax preparer can avoid long, drawn-out delays by
immediately correcting the return and transmitting it again.

There's a comfort factor for tax preparers in knowing that the
IRS has received their returns and that they are correct. Wayne Ayers of
Roanoke, Virginia, for example, has been in the tax preparation business
for 24 years. Just in the past few years, he has electronically filed
thousands of returns directly to the IRS. "A certified return
receipt doesn't prove that the IRS received a client's return
on a specific day. With electronic filing, the IRS has your
client's return usually within 60 seconds and you have proof that
it's been accepted."

In One Way or Another, "It's Profitable"

By offering electronic filing services, practitioners open themselves
up to a number of profitable possibilities. Electronic filing can help
attract new clients and more revenue per customer. It usually cuts down
on the amount of time preparers spend corresponding with the IRS. It
gives practitioners the opportunity to provide clients with faster
refunds and refund anticipation loans. And, it is often an effective way
to stand out from the pack and compete in today's marketplace.

While some preparers choose not to bill clients for electronic filing
returns, most charge between $20 and $50 for the service. Since its
introduction, Marvin Cok has been charging his clients in Spartanburg,
South Carolina, a $25 fee for indirect electronic filing. "In real
numbers of returns, electronic filing has increase about 20% per year
for me." Marvin filed 240 returns electronically through a service
bureau during the 1990 tax season.

For Bill Opaska, "this second year I increase my customer base
by about 12% though electronic filing." Bill's fee is $20 for
each return he files electronically and only transmits returns he has
prepared. On the other hand, Tim Meredith does not charge for the
service as long as he has prepared the return. "It's a real
good advertising point when everyone else is charging $20. In 1988, I
transmitted about 75 returns and in 1989 I sent around 500
electronically." This past season, Tim electronically filed between
800 and 900 returns directly to the IRS for his clients in the
Morristown, Tennessee, area.

Increase of as much as 100% in the number of electronic transmissions
were reported by practitioners for the 1991 tax season. Some preparers
believed electronic filing gave them a competitive edge because it
allowed them to provide clients with another valuable service. Others
found that it brought in more business and revenue. All agreed that
their investment in electronic filing software -- regardless of whether
they used the direct or indirect method -- quickly pays for itself.

"It's A Real Winner"

Now celebrating its 10th anniversary with 30 offices throughout Ohio,
Kentucky and West Virginia, DanTax, Inc., a franchise tax business, is
finding that electronic filing is a highly profitable service. Company
Vice President, Claudette Huggins, reported that electronic filing
generated nearly $93,000 for participating DanTax offices during the
1990 tax season. "It's been a great financial boom for us.
Especially since we use in-house software and transmit directly to the
IRS. If we had gone through a service bureau, we would have given up
about $30,000 of the income produced from electronic filing. Next year
should be even better because all of our offices will be offering
electronic filing services to clients."

"Only a few short years ago," Claudette recalls "maybe
one out of 10 clients were asking for electronic filing. This last year,
it was more like one out of every three clients. Electronic filing fits
right in with how we work with our clients. Service has always been and
always will be our Number One priority at DanTax. There's no
question that electronic filing is a service our clients want."

"There Are Still Some Kinks to Work Out"

The verdict is till out on the subject of electronically filing
balance due returns. Many said they cannot imagine clients paying a fee
to transmit an amount due return. Suggestions to get taxpayers on board
with this program ranged from offering an incentive, such as 10% IRS
discount on the amount owed, to making it mandatory for balance due
returns to be filed electronically.

However, William Buerger, a private practitioner in Hunlock Creek,
Pennsylvania, had a different perspective. He pointed out that
"knowing the IRS has accepted the balance due return before the
deadline is like having an insurance plan."

On the topic of the IRS' support of tax preparers, the reviews
were mixed. "We're saving the IRS a lot of money and they
don't even have an 800-number for electronic filing,"
according to James Bone, Jr. Marvin Cok believes, "The IRS needs to
work the bugs out more quickly, like correctly matching primary and
secondary Social Security numbers" (an area the IRS is committed to
enhancing this tax season). But as far as Tim Meredith is concerned, the
IRS is doing a good job: "I work with the electronic filing center
in Cincinnati. It's run like a business. And it's amazing how
helpful the people there have been."

Transmitting Prepared Returns vs. Those Off the Street

While some practitioners indicated a willingness to accept
self-prepared returns for electronic transmission, others are reluctant
to do so because of the potential problems such returns can present.
"What concerns me the most about electronically filing
off-the-street returns," says Claudette Huggins "is if
there's a mistake in the return, the taxpayer can have much longer
IRS delays than ever before. An incorrect calculation or an accidental
name reversal that is not immediately detected by the IRS can cause
tremendous problems in the electronic filing process. I've seen
these kinds of errors take the IRS six to eight months to straighten
out."

Some Final Words of Advice

From all indications, electronic filing's popularity is growing
by leaps and bounds. As Tim Meredith remarked, "If you don't
offer electronic filing, those clients who want it will go
elsewhere." "It's a convenience that more and more
clients want an another money-making service for your practice," as
William Buerger sees it. Claudette Huggins of DanTax is firmly convinced
that "Practitioners who don't offer it within the next three
years will be out of business."

Perhaps Wayne Ayers summed it up best: "Electronic filing is
just part of the computerization of taxes and the Internal Revenue
Service. It's necessary, and a lot easier to do than most
practitioners think. There's no doubt about it ... pretty soon it
sill be just like another ta form you fill in."

One thing is for sure. Whether or not the IRS' overall Tax
Systems Modernization succeeds, electronic filing is a winning
proposition for the IRS, taxpayers and practitioners. Over 14 million
returns are expected to be filed electronically this coming tax year.
What was the "wave of the future" not long ago is
unquestionably here to stay. Tax practitioners should get ready for it
now or the wave may sweep them away.

Jim Petersen is the president of Best Programs, Inc., in Reston,
Virginia, and can be reached at (703) 709-5200.

COPYRIGHT 1992 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.